Discussion
Impaler_2019
Chap003.pptPowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA
Job-Order Costing
Chapter 03
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 3: Job-Order Costing.
Managers need to assign costs to products to facilitate external financial reporting and internal decision making. This chapter illustrates an absorption costing approach to calculating product costs known as job-order costing.
3-*
Job-Order Costing: An Overview
Job-order costing systems are used when:
- Many different products are produced each period.
- Products are manufactured to order.
- The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.
Job-order costing systems are used when:
- Many different products are produced each period.
- Products are manufactured to order.
- The unique nature of each order requires tracing or allocating costs to each job, and maintaining cost records for each job.
3-*
Job-Order Costing: An Overview
Examples of companies that
would use job-order costing include:
- Boeing (aircraft manufacturing)
- Bechtel International (large scale construction)
- Walt Disney Studios (movie production)
Companies that may benefit from using job order costing systems include Boeing, Bechtel International, and Walt Disney Studios.
Boeing is an aircraft manufacturer. Bechtel is perhaps the largest international construction company. The company works on huge projects that are unique to customer needs. Walt Disney Studios produces movies and entertainment parks.
3-*
Job No. 1
Job No. 2
Job No. 3
Charge direct material and direct labor costs to each job as work is performed.
Job-Order Costing – An Example
Direct Materials
Direct Labor
In a job-order costing system, direct materials and direct labor are traced directly to each job as the work is preformed.
3-*
Manufacturing Overhead, including indirect materials and indirect labor, are allocated to all jobs rather than directly traced to each job.
Job-Order Costing – An Example
Direct Materials
Direct Labor
Job No. 1
Job No. 2
Job No. 3
Manufacturing Overhead
Indirect manufacturing costs are referred to as manufacturing overhead. Manufacturing overhead includes both indirect materials and indirect labor. These costs are allocated to jobs rather than directly traced to each job.
3-*
The Job Cost Sheet
PearCo Job Cost Sheet
Job Number A - 143
Date Initiated 3-4-11
Date Completed
Department B3
Units Completed
Item Wooden cargo crate
Direct Materials
Direct Labor
Manufacturing Overhead
Req. No.
Amount
Ticket
Hours
Amount
Hours
Rate
Amount
Cost Summary
Units Shipped
Direct Materials
Date
Number
Balance
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
The job cost sheet is used by the accounting department to track the direct and indirect costs associated with a given job. A job number uniquely identifies each job. Direct material, direct labor, and manufacturing overhead costs are accumulated for each job. The job cost sheet is a subsidiary ledger to the Work in Process account.
We will look at a job cost sheet used by a hypothetical company called PearCo. The company has a job that calls for the construction of wooden cargo crates. You can see the separate sections for direct materials, direct labor, and manufacturing overhead. In addition, we have a section to summarize total costs of the job.
3-*
Measuring Direct Materials Cost
Will E. Delite
Once a sales order has been received and a production order issued, the Production Department prepares a materials requisition form to specify the type, quantity, and total cost of materials.
Here is the materials requisition form completed for job A - 143. The requisition is number X7 - 6890. The worker has requested twelve 2 by 4s, 12 feet long, and twenty 1 by 6s, 12 feet long. The unit cost of the lumber is shown in the unit cost column. The quantity requested is multiplied by the unit cost to arrive at the total cost for materials. The person in charge of the storeroom will issue the lumber once the materials requisition form has been properly authorized.
For an existing product, the production department can refer to a bill of materials to determine the type and quantity of each item of materials needed to complete a unit of product.
3-*
Measuring Direct Materials Cost
Once the materials have been issued by the storeroom, they are charged to the job cost sheet for job number A – 143. The Accounting Department records the total direct cost, $116, on the appropriate job cost sheet. Notice, the material requisition number, X7-6869, is included on the job cost sheet to provide easy access to the source document. We have a proper reference for the requisition number and the total amount. If we need to look at the details of the $116 cost, we can ask to see materials requisition form X7-6890.
))Sheet1
| PearCo Job Cost Sheet | |||||||||
| Job Number A - 143 | Date Initiated 3-4-11 | ||||||||
| Date Completed | |||||||||
| Department B3 | Units Completed | ||||||||
| Item Wooden cargo crate | |||||||||
| Direct Materials | Direct Labor | Manufacturing Overhead | |||||||
| Req. No. | Amount | Ticket | Hours | Amount | Hours | Rate | Amount | ||
| X7-6890 | $ 116 | ||||||||
| Cost Summary | Units Shipped | ||||||||
| Direct Materials | $ 116 | Date | Number | Balance | |||||
| Direct Labor | |||||||||
| Manufacturing Overhead | |||||||||
| Total Cost | |||||||||
| Unit Product Cost |
))Sheet2
))Sheet3
))Sheet4
))Sheet5
))Sheet6
))Sheet7
))Sheet8
))Sheet9
))Sheet10
))Sheet11
))Sheet12
))Sheet13
))Sheet14
))Sheet15
))Sheet16
3-*
Measuring Direct Labor Costs
Workers use time tickets to record the amount of time that they spent on each job. Rather than paper and pencil to maintain employee time tickets. A completed time ticket is an hour-by-hour summary of the employee’s activities throughout the day.
Here is the time ticket for an employee who worked eight hours on job A – 143. The employee’s hourly pay rate is $11, so the total labor cost charged to the job will be $88. The time ticket, number 36, serves as the major source document for labor costs charged to this job.
Let’s look at the labor posting to the job cost sheet.
Sheet1
| PearCo Employee Time Ticket | |||||||
| Time Ticket No. 36 | Date | 3-5-11 | |||||
| Employee | I. M. Skilled | Station | 42 | ||||
| Starting | Ending | Hours | Hourly | ||||
| Time | Time | Completed | Rate | Amount | Job No. | ||
| 0800 | 1600 | 8.00 | $ 11.00 | $ 88.00 | A-143 | ||
| Totals | 8.00 | $ 11.00 | $ 88.00 | A-143 | |||
| Supervisor | C. M. Workman |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet7
Sheet8
Sheet9
Sheet10
Sheet11
Sheet12
Sheet13
Sheet14
Sheet15
Sheet16
3-*
Job-Order Cost Accounting
The Accounting Department records the labor costs from each time ticket onto the job cost sheet. On the job cost sheet, we can see that time ticket number 36 posted 8 hours to job A – 143. The total amount of direct labor cost is $88. This amount is also posted to the summary section of the job cost sheet.
Sheet1
| PearCo Job Cost Sheet | |||||||||
| Job Number A - 143 | Date Initiated 3-4-11 | ||||||||
| Date Completed | |||||||||
| Department B3 | Units Completed | ||||||||
| Item Wooden cargo crate | |||||||||
| Direct Materials | Direct Labor | Manufacturing Overhead | |||||||
| Req. No. | Amount | Ticket | Hours | Amount | Hours | Rate | Amount | ||
| X7-6890 | $ 116 | 36 | 8 | $ 88 | |||||
| Cost Summary | Units Shipped | ||||||||
| Direct Materials | $ 116 | Date | Number | Balance | |||||
| Direct Labor | $ 88 | ||||||||
| Manufacturing Overhead | |||||||||
| Total Cost | |||||||||
| Unit Product Cost |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet7
Sheet8
Sheet9
Sheet10
Sheet11
Sheet12
Sheet13
Sheet14
Sheet15
Sheet16
3-*
Why Use an Allocation Base?
An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to individual jobs.
We use an allocation base because:
- It is impossible or difficult to trace overhead costs to particular jobs.
- Manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager’s salary.
- Many types of manufacturing overhead costs are fixed even though output fluctuates during the period.
An allocation base, such as direct labor hours, direct labor dollars, or machine hours, is used to assign manufacturing overhead to products. Allocation bases are used because:
- It is impossible or difficult to trace these costs to particular jobs (i.e., manufacturing overhead is an indirect cost).
- Manufacturing overhead consists of many different items ranging from the grease used in machines to the production manager’s salary.
- Many types of manufacturing overhead costs are fixed even though output may fluctuate during the year.
3-*
The predetermined overhead rate (POHR) used to apply overhead to jobs is determined before the period begins.
Manufacturing Overhead Application
The predetermined overhead rate is calculated by dividing the estimated amount of manufacturing overhead for the coming period by the estimated quantity of the allocation base for the coming period. Ideally, the allocation base chosen should be the cost driver of overhead cost.
3-*
Using a predetermined rate makes it
possible to estimate total job costs sooner.
Actual overhead for the period is not
known until the end of the period.
The Need for a POHR
Predetermined overhead rates that rely upon estimated data are often used because: (1) actual overhead costs for the period are not known until the end of the period, thus inhibiting the ability to estimate job costs during the period; and (2) actual overhead costs can fluctuate seasonally, thus misleading decision makers.
3-*
Computing Predetermined Overhead Rates
The predetermined overhead rate is computed before the period begins using a four-step process.
- Estimate the total amount of the allocation base (the denominator) that will be required for next period’s estimated level of production.
- Estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base.
- Use the following equation to estimate the total amount of manufacturing overhead:
- Compute the predetermined overhead rate.
Y = a + bX
Where,
Y = The estimated total manufacturing overhead cost
a = The estimated total fixed manufacturing overhead cost
b = The estimated variable manufacturing overhead cost
per unit of the allocation base
X = The estimated total amount of the allocation base.
The predetermined overhead rate is computed before the period begins using a four-step process.
- Estimate the total amount of the allocation base (the denominator) that will be required for next period’s estimated level of production.
- Estimate the total fixed manufacturing overhead cost for the coming period and the variable manufacturing overhead cost per unit of the allocation base.
- Use the following equation to estimate the total amount of manufacturing overhead:
Y = a + bX
Where,
Y = The estimated total manufacturing overhead cost
a = The estimated total fixed manufacturing overhead cost
b = The estimated variable manufacturing overhead cost
per unit of the allocation base
X = The estimated total amount of the allocation base.
4. Compute the predetermined overhead rate.
Let’s look at a PearCo example.
3-*
Overhead Application Rate
POHR = $4.00 per direct labor-hour
PearCo estimates that it will require 160,000 direct labor-hours to meet the coming period’s estimated production level. In addition, the company estimates total fixed manufacturing overhead at $200,000, and variable manufacturing overhead costs of $2.75 per direct labor hour.
Y = a + bX
Y = $200,000 + ($2.75 per direct labor-hour × 160,000 direct labor-hours)
Y = $200,000 + $440,000
Y = $640,000
$640,000 estimated total manufacturing overhead
160,000 estimated direct labor hours (DLH)
POHR =
PearCo estimates that it will require 160,000 direct labor hours to meet the coming period’s estimated production level. In addition, the company estimates total fixed manufacturing overhead at $200,000, and variable manufacturing overhead costs of $2.75 per direct labor hour.
Using the equation on the previous screen we calculation the estimated total manufacturing overhead as follows:
Y = a + bX
Y = $200,000 + ($2.75 per direct labor-hour × 160,000 direct labor-hours)
Y = $200,000 + $440,000
Y = $640,000
Calculating the predetermined overhead rate we divide the $640,000 estimated total manufacturing overhead by the 160,000 total estimated direct labor-hours to arrive at a rate of $4 per direct labor-hour worked on a specific job.
3-*
Job-Order Cost Accounting
Recall that an employee worked a total of 8 hours on Job A-143. Our predetermined overhead rate is $4 per direct labor-hour, so we will apply $32 (8 hours times $4 per direct labor-hour) of overhead to this job. The computation is shown in the manufacturing overhead section of the job cost sheet and in the summary section.
Sheet1
| PearCo Job Cost Sheet | |||||||||
| Job Number A - 143 | Date Initiated 3-4-11 | ||||||||
| Date Completed | 3-5-11 | ||||||||
| Department B3 | Units Completed | 2 | |||||||
| Item Wooden cargo crate | |||||||||
| Direct Materials | Direct Labor | Manufacturing Overhead | |||||||
| Req. No. | Amount | Ticket | Hours | Amount | Hours | Rate | Amount | ||
| X7-6890 | $ 116 | 36 | 8 | $ 88 | 8 | $ 4 | $ 32 | ||
| Cost Summary | Units Shipped | ||||||||
| Direct Materials | $ 116 | Date | Number | Balance | |||||
| Direct Labor | $ 88 | ||||||||
| Manufacturing Overhead | $ 32 | ||||||||
| Total Cost | |||||||||
| Unit Product Cost |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet7
Sheet8
Sheet9
Sheet10
Sheet11
Sheet12
Sheet13
Sheet14
Sheet15
Sheet16
3-*
Job-Order Cost Accounting
The total direct material, direct labor, and manufacturing overhead costs assigned to Job A-143 is $236.
Sheet1
| PearCo Job Cost Sheet | |||||||||
| Job Number A - 143 | Date Initiated 3-4-11 | ||||||||
| Date Completed | 3-5-11 | ||||||||
| Department B3 | Units Completed | 2 | |||||||
| Item Wooden cargo crate | |||||||||
| Direct Materials | Direct Labor | Manufacturing Overhead | |||||||
| Req. No. | Amount | Ticket | Hours | Amount | Hours | Rate | Amount | ||
| X7-6890 | $ 116 | 36 | 8 | $ 88 | 8 | $ 4 | $ 32 | ||
| Cost Summary | Units Shipped | ||||||||
| Direct Materials | $ 116 | Date | Number | Balance | |||||
| Direct Labor | $ 88 | ||||||||
| Manufacturing Overhead | $ 32 | ||||||||
| Total Cost | $ 236 | ||||||||
| Unit Product Cost |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet7
Sheet8
Sheet9
Sheet10
Sheet11
Sheet12
Sheet13
Sheet14
Sheet15
Sheet16
3-*
Job-Order Cost Accounting
Since this particular job included 2 units of production, the average cost per unit is $118. We calculated the average cost by dividing the total cost of $236 by the 2 crates produced.
The average unit cost should not be interpreted as the costs that would actually be incurred if another unit was produced. The fixed overhead would not change if another unit were produced, so the incremental cost of another unit is something less than $118.
Sheet1
| PearCo Job Cost Sheet | |||||||||
| Job Number A - 143 | Date Initiated 3-4-11 | ||||||||
| Date Completed | 3-5-11 | ||||||||
| Department B3 | Units Completed | 2 | |||||||
| Item Wooden cargo crate | |||||||||
| Direct Materials | Direct Labor | Manufacturing Overhead | |||||||
| Req. No. | Amount | Ticket | Hours | Amount | Hours | Rate | Amount | ||
| X7-6890 | $ 116 | 36 | 8 | $ 88 | 8 | $ 4 | $ 32 | ||
| Cost Summary | Units Shipped | ||||||||
| Direct Materials | $ 116 | Date | Number | Balance | |||||
| Direct Labor | $ 88 | ||||||||
| Manufacturing Overhead | $ 32 | ||||||||
| Total Cost | $ 236 | ||||||||
| Unit Product Cost | $ 118 |
Sheet2
Sheet3
Sheet4
Sheet5
Sheet6
Sheet7
Sheet8
Sheet9
Sheet10
Sheet11
Sheet12
Sheet13
Sheet14
Sheet15
Sheet16
3-*
End of Chapter 03
End of Chapter 3.
PearCo Materials Requisition Form
Requisition No. X7 - 6890Date 3-4-11
Job No. A - 143
Department B3
DescriptionQuantityUnit CostTotal Cost
2 x 4, 12 feet123.00$ 36.00$
1 x 6, 12 feet204.00 80.00
116.00$
Authorized
Signature
PearCo Job Cost Sheet
Job Number A - 143Date Initiated 3-4-11
Date Completed
Department B3Units Completed
Item Wooden cargo crate
Direct MaterialsDirect LaborManufacturing Overhead
Req. No.AmountTicketHoursAmountHoursRateAmount
X7-6890116$
Cost SummaryUnits Shipped
Direct Materials116$ DateNumberBalance
Direct Labor
Manufacturing Overhead
Total Cost
Unit Product Cost
PearCo Employee Time Ticket
Time Ticket No. 36 Date3-5-11
EmployeeI. M. Skilled Station42
StartingEndingHoursHourly
TimeTimeCompletedRateAmountJob No.
080016008.0011.00$ 88.00$ A-143
Totals8.0011.00$ 88.00$ A-143
Supervisor
C. M. Workman
PearCo Job Cost Sheet
Job Number A - 143Date Initiated 3-4-11
Date Completed
Department B3Units Completed
Item Wooden cargo crate
Direct MaterialsDirect LaborManufacturing Overhead
Req. No.AmountTicketHoursAmountHoursRateAmount
X7-6890116$ 36888$
Cost SummaryUnits Shipped
Direct Materials116$ DateNumberBalance
Direct Labor88$
Manufacturing Overhead
Total Cost
Unit Product Cost
PearCo Job Cost Sheet
Job Number A - 143Date Initiated 3-4-11
Date Completed 3-5-11
Department B3Units Completed2
Item Wooden cargo crate
Direct MaterialsDirect LaborManufacturing Overhead
Req. No.AmountTicketHoursAmountHoursRateAmount
X7-6890116$ 36888$ 84$ 32$
Cost SummaryUnits Shipped
Direct Materials116$ DateNumberBalance
Direct Labor88$
Manufacturing Overhead32$
Total Cost
Unit Product Cost
PearCo Job Cost Sheet
Job Number A - 143Date Initiated 3-4-11
Date Completed 3-5-11
Department B3Units Completed2
Item Wooden cargo crate
Direct MaterialsDirect LaborManufacturing Overhead
Req. No.AmountTicketHoursAmountHoursRateAmount
X7-6890116$ 36888$ 84$ 32$
Cost SummaryUnits Shipped
Direct Materials116$ DateNumberBalance
Direct Labor88$
Manufacturing Overhead32$
Total Cost236$
Unit Product Cost
PearCo Job Cost Sheet
Job Number A - 143Date Initiated 3-4-11
Date Completed 3-5-11
Department B3Units Completed2
Item Wooden cargo crate
Direct MaterialsDirect LaborManufacturing Overhead
Req. No.AmountTicketHoursAmountHoursRateAmount
X7-6890116$ 36888$ 84$ 32$
Cost SummaryUnits Shipped
Direct Materials116$ DateNumberBalance
Direct Labor88$
Manufacturing Overhead32$
Total Cost236$
Unit Product Cost118$
